Why More Customers Than Ever Before are Transitioning From “Big-Box Banks” to Community Banks

3/1/18

The transition to community banks from larger corporate banks in recent years has exceeded many expectations—and the trend shows little sign of reversing any time soon. There are countless factors which have led to this mass migration.

The Growth of Community Banks. First, let's look at the numbers. Community banks have frequently struggled to keep up with the growth and general success of their larger corporate competitors in earlier years, for any number of reasons. Structural roadblocks used to make it difficult for smaller banks to put together the infrastructure necessary to offer basic services of convenience such as ATM's, much less access to advanced financial services and investment tools such as money markets and CDs. While it wasn't a universal truth, a huge number of community banks would offer checking accounts, savings accounts, the occasional loan or line of credit, and not much else.

A lot has changed in the past decade, however. Large corporate banks have come under increased regulatory scrutiny alongside various other efforts to improve the competitive potential of community banks. The underlying infrastructure of finance has also become far more flexible and convenient, meaning the average community bank can offer anything and everything its larger competitors might—and frequently, do so with better terms.

Perhaps most importantly, people are thinking about community banks and corporate banks a lot more than they used to—and they're seeing two things:

Benefits of Community Banks. A major component in the transition to community banks as a major factor in personal finance lay in the many perceived benefits of smaller financial institutions, especially those tied to the local community in some way.

Superior customer care. There are a lot of reasons community banks have earned a reputation for superior in-house customer support. In some cases, it's a question of quality control; a particular branch or office of a large corporate bank may be amazing or awful, with little way of knowing which until you've had an account open for a while. Community banks need to serve the community well, and fail if they do not.

Fewer top-down issues. When you bank with a larger corporate bank, there's always a sense that someone up the chain might cause problems eventually. Even if the local branch of your bank suits your needs today, there's always the concern that tomorrow or the next day a nationwide policy change ties the local manager's hands and turn your service terrible. A community bank also has far greater leeway and flexibility in dealing with individual customers, as they need not adhere to strict guidelines enforced across a national or international corporate bank.

More likely to offer loans. While community banks still need to turn a profit from lending, bringing the scale of the operation down to the local level creates an incentive to adapt to local needs. That means setting standards that make sense for the community. There's also the simple factor that many community banks offer highly competitive loan terms as an incentive to make the switch.

Convenience. In many cases, there's a simple convenience to dealing with a local bank with ties to the community that corporate banks might lack. While the software that drives modern finance may have greatly eased many of the headaches of banking from years past, there's still room for the occasional hiccup when something needs approval from above or makes an unusual jump across accounts. Working with the same smaller bank that others in your community use can make life easier.

Problems in Large Corporate Banks. Of course, many customers transitioning to smaller banks do so as much to escape larger corporate banks as for any benefits they may gain. In many cases, the benefits come as a pleasant surprise after the decision has already been made. Factors pushing customers from corporate financial institutions include:

Focus on large corporate clients and finance. It's generally understood that corporate banks make their money not from personal checking accounts and savings accounts, but from their larger corporate accounts and investment endeavors. Many customers prefer to be a priority at their bank—not an afterthought.

Risk. Many customers look at the risks large corporate banks take on a regular basis and feel nervous putting their money in the hands of such companies. While the actual risk to their money and investments may be minimal, it's a question of perception. It's worth it not to have to wonder, for many customers making the move.

Abusive practices. Many customer-unfriendly practices have become standard at larger corporate banks. Even in the face of court rulings and regulations intended to reign in the worst abuses, plenty of issues continue to slip through the cracks and make life difficult.

Negative press. No one likes the idea that they do business with a bad company. While many customers will continue to shop at unconscionable stores or buy products made in dubious ways, there's little reason to continue banking with a large corporate bank in 2017. When a customer at a large bank sees that bank in the news for a major scandal or as the loser in a legal battle, they don't stand to lose much by making the leap to a smaller bank for a cleaner conscience.

Why now? Many of these benefits and problems have existed in similar forms for a long time without it leading to the mass migration seen today. There are a few factors which likely contribute to the transition happening now instead of years ago, but most of it comes down to technology. There are countless tools out there for automating finance, investment, banking, payment processing, and the myriad other services offered by banks large and small. This means it's far more feasible for smaller institutions to offer competitive features.

It's no secret that debt has become a significant issue in America, and thus it shouldn't be a surprise that many customers make the move to a community bank. Smaller banks tend to be more flexible in their loans and offer friendlier terms than their corporate counterparts. Community banks need to respond to the financial realities of their communities, where corporate banks may set national standards and cut off entire branches from borrowing as a result. The places where corporate banks are worst equipped to serve the community in turn have seen the fastest rise of community banks.

Growing financial savvy and an interest in investment combined at the same time that there has been so much negative press for corporate banks may also contribute. After so many scandals involving corporate banks mistreating their personal finance customers, customers may rightly feel that a community bank has more reason to care about small scale investments into money markets and CDs.

Moving Forward. It's likely the trend of transitioning to community banks will continue, for a few key reasons. First, it's unlikely that the gap in features between small banks and large banks will open back up again; it's simply too easy for smaller banks to offer their customers a rich set of personal finance solutions with modern technology--you aren't trapped running around town looking for ATM's that take your weird community bank card in 2017. This eliminates perhaps the only key advantage larger banks ever held, so as long as people stay with their community bank or leave corporate banks out of frustration, the trend will continue even if it slows.

In a strange way, improved finance technology may widen the gap in service further between large banks and community banks. If the tools large corporate banks use to maximize margins and eliminate waste point to branches and services in less valuable communities as a waste of funds as currently managed, it will lead to cut corners or reduced in-house customer support.

While there's no sign of it occurring any time too soon, there have been rumblings of the possibility that large corporate banks may end fading out of the personal banking market. Many of the largest corporate banks depend almost exclusively on their investment banking operations to make a profit—personal banking services for such companies act as PR and branding tools more than anything else. And arguably, they've done poorly in this regard.

For over 40 years, Bridgeview Bank has delivered uncompromising customer service and financial expertise to Chicago area residents and businesses — without the hassles and impersonal service of big box banks.

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